More on the Stock Market Rally No One Is Talking About

By Michael Lombardi, MBA Published : August 11, 2008

With the Dow Jones Industrial Average jumping 302.80 points on Friday, we are getting closer to the bellwether index having rallied 10% in less than one month. All this is happening rather quietly as the media focuses primarily on the poor housing market. If there ever was a time that the stock market was climbing a wall of worry, this is it.

Three factors are sending stock prices higher. The U.S. dollar has gained four percent against the euro in less than four weeks. The dollar had its biggest weekly gain against the euro in almost eight years last week. And a higher U.S. dollar leads to lower oil prices – – something the stock market loves.

Oil prices fell on Friday to $115.00 U.S. per barrel — down from their peak of $147.00 on July 11, 2008. Lower oil prices equate to higher profits for companies, which equates to higher stock prices for those companies.

Finally, stock prices became severely oversold by the first half of July. With all the doom and gloom we have been fed, and those stifling oil prices, stock prices fell too quickly and too deeply. A rebound from the severely oversold condition stocks had fallen into was more than due. And I expect further gains ahead.

Just this past Wednesday, I wrote a column in PROFIT CONFIDENTIAL entitled, “An Explosive Stock Market? You Won’t Read It Elsewhere.” This was the most important paragraph from the commentary:

“As a contrarian, I’ve always done well betting and going against the crowd. And the obvious and strong consensus today is that the U.S. economy is pathetic. But the stock market is telling us a different story. While we read and hear that this is the worst economy in two decades, the stock market is not trading at its bottom — it is rallying from it!”

The flavor of the day is against commodities. With the European economy no better than ours, and with China’s stock market down to a new 19-month low, investors are returning to American stocks. As stock investors, we need to savor, enjoy and profit from the moment.

Commodities became overbought and the stock market became oversold. The roles have reversed for now, and while I will do my best to keep my readers informed as to when the trend will again change again, the bottom line is that stocks are now in a definite uptrend.

I’m assuming the rallying stock market is putting severe pressure on the record number of shorts on the New York Stock Exchange. As the market moves higher, and those shorts are forced to cover, we could see more explosive single-day stock market rallies.